Taxation Law

Running head: TAXATION LAW
Taxation Law
Name of the Student
Name of the University
Authors Note
Course ID

TAXATION LAW1
Table of Contents
Answer to question 1:.................................................................................................................2
Issues:.....................................................................................................................................2
Laws:......................................................................................................................................2
Application:............................................................................................................................4
Conclusion:............................................................................................................................6
Answer to question 2:.................................................................................................................7
Issues:.....................................................................................................................................7
Laws:......................................................................................................................................7
Application:..........................................................................................................................10
Conclusion:..........................................................................................................................12
References:...............................................................................................................................14

TAXATION LAW2
Answer to question 1:
Issues:
Will the taxpayer be held liable for tax for the receipt of compensatory damages under
“Division 6” or “subsection 25 (1), ITAA 1936”? Is the receipt of interest from the damages
pay-out will be included into the assessable income of the Our Earth Pty Ltd? Will the
taxpayer be held liable for assessment purpose for the reimbursement of the legal expenditure
occurred by Our Earth Pty Ltd?
Laws:
Typical compensation receipts that are received by the taxpayer includes the
insurance payments, receipts by the business from another party that have failed to carry out
their contractual obligations, payment that are received for entering into the restrictive
covenants and loss of usage of money will be considered as income in nature (Woellner et al.,
2016). A compensation receipts that is received by a business as the right of seeking
compensation or due to the cause of action or any form of proceedings introduced by
business as the right or in relation to the underlying asset are treated as compensatory
receipts. Compensation received as the damages will be included into the assessable income
with respect to ordinary meaning of “Division 6 of the ITAA 1997” or will be included as
statutory income.
As defined in “section 25 (1), ITAA 1997” compensatory payments that are received
is considered taxable given the payments that are received is related to the loss of income,
particularly the profits or interest from previous years (Braithwaite & Reinhart, 2019). The
law court in the “Mc Laurin v FC of T (1961)” held that receipt of compensation was
considered taxable within the legislative provision of “subsection 25 (1), ITAA 1936” till the
portion of payment that is received was recognizable and assessable as income.

TAXATION LAW3
In order to ascertain whether the receipt of compensation amounts to ordinary income
or capital receipts, it is entirely dependent on the nature of payment. When a compensation
payment received is carrying the nature of income with respect to the ordinary concepts then
“section 6-5, of the ITAA 1997” is applicable (Martin & Connor, 2017). For example, the
compensatory payments are considered assessable income when it is received as either
recurrent or periodic payments which is not in the form of instalments of lump sum.
As held in the case of “Californian Oil Products Ltd v Federal Commissioner of
Taxation (1934)” amount that are paid as damages, compensation or to cover the loss of
income occurred during the course of business of the company then it will be considered as
taxable income (Blakelock & King, 2017). The main reason for this is that it is a part of profit
that are derived from carrying on the business activities even though it is as a result of
unusual or extraordinary occasions or situations.
The taxation commissioner in “CT (Vic) v Phillips (1936)” passed its verdict by
stating that if the taxpayer receives a compensation that relates to the loss of business
revenues or commercial scheme and forms the substance of business activities, then the
compensation will be considered as the loss of capital asset (Barkoczy, 2016). Therefore,
because of the absence of countervailing examination then the receipts would be treated as
capital receipts. As held in the case of “FC of T v Spedley Securities Ltd (1988)” the federal
court stated that compensatory damages for goodwill was treated as capital item. The receipt
of compensation was treated as injury to capital asset.
Where a taxpayer receives interest as the part of compensatory amount then the
interest is considered as taxable income for the taxpayer under the normal provision of
income. The federal court in the case of “Whitaker v FCT (1998)” explained that post
judgement interest are regarded as having the character of interest is treated as income within